Consumers know that some fraction X of all new cars produced and sold in the market are defective.The defective ones cannot be identified except by those who own them.Assume for this problem that cars do not depreciate with use.
The lemons problem provides owners of above average quality cars an incentive to

Question

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Offering a warranty can signal to buyers that the car is of higher quality, as sellers of defective cars are less likely to offer warranties due to the potential costs of honoring them.

Consumers Know That Some Fraction X of All New Cars